In January 2016, Iranian multinational car maker Khodro signed a Memorandum of Understanding (MoU) with the Oman Investment Fund to build an automobile plant in the southern Omani port of Duqm.
The $200mn joint venture Orchid International Auto would be owned 60% by the fund and 20% by Iran Khodro.
The Iranian automotive group plans to become operational in 2017, and produce 20,000 units by 2018.
Five thousand units are intended for Oman while the other 15,000 will be supplied to markets in Ethiopia, Eritrea, Sudan and Yemen.
The deal is expected to create significant business opportunities for the Sultanate’s rapidly growing plastics industry.
And while Iranian companies are looking to expand into new markets, for Oman the MoU is a source of diversifying its economy, says Dr. Florence Eid-Oakden, chief economist at leading London-based research firm Arabian Monitor.
“Oman is becoming a stepping stone for Iranian companies seeking to enter African, Asian and Arab markets. Mixed with the fact that Oman is the closest GCC country to Iran, the creation of the $200mn joint venture is just another sign of bilateral benefits across the two countries.”
After the completion of the Liwa Plastics Industry Complex by 2019, plastics production in the country is expected to increase by one million tonnes, bringing its total output to 1.4mn tonnes of polyethylene and polypropylene.
Developing a home-grown car manufacturing industry could create significant domestic demand for petrochemical products whose main market is automotive.
It would also incentivise producers to manufacture higher value, specialised products, and take their operations further downstream.
“Facilitating trade agreements with a growth-oriented unsanctioned Iran is one way of diversifying the [Omani] economy and an opportunity for growth and job creating prospects. Such deals will have positive multiplier effect on several industrial sectors in Oman including the plastics industry,” Eid-Oakden said.
Traditionally, Iran has posed as a major rival to GCC petrochemical producers, calling into question the rationality behind the decision to collaborate in markets in which the two countries are normally seen as competitors. However, experts are of the opinion that the benefits largely outweigh the risks, and would pay off in the long run.
“The collaboration comes after both countries realised their counterpart’s importance in the quest for growth prospects. Although the collaboration in industries that Oman and Iran compete in seems challenging, it serve as a means of increasing market shares for both countries and gaining regional trading routes,” Eid-Oakden said.
Strengthening its economic ties with its Persian neighbour would also prove strategic in bringing in new streams of revenue to the Sultanate’s cash-stripped coffers. Oman is facing an $8.6bn budget deficit in 2016 and earlier this year in a bid to cushion the impact of low oil prices, the government announced significant tax hikes on petrochemical and LNG firms. Although subject to regulatory approval, downstream producers are expected to be taxed 35% on their company revenues, a major increase from the current 12%, while LNG suppliers will see their corporate tax jump to 55%, up from 15% presently.
At a time of shaky business confidence, significant budget cuts, and reduced capital spending, such measures could likely prove detrimental to new foreign investment into the country.
“Tax hikes on petrochemicals and LNG will certainly affect oil and gas mining revenues which will in turn discourage foreign direct investment in this sector,” said Eid-Oakden.
“Nonetheless one must note that the sultanate is preparing to take certain measures to balance raising taxes and at the same time promote foreign investment by implementing new foreign capital investment law.
“The sultanate is keen on raising the levels of foreign direct investment — Oman’s share of FDI among the GCC is only 3%, down from 8% in 2003 — and it is well aware of the consequences of the tax hike. However, balancing the government budget deficit seems as a priority in the meantime.”
Oman’s desperate need of diversifying its sources of capital plays right into the hands of the Islamic Republic, as it forges ahead with plans to secure a hefty share in regional and global markets and make long-term economic alliances.
“Maintaining close economic ties with Iran –ties that complements the political collaboration- ensures large trade and capital flow to Oman,” said Eid-Oakden.
“This was evident in joint venture deals like the MoU with the Iranian car manufacturer Khodro, increase in gas imports from Iran, and an overall enhancement in the Omani trade balance vis-à-vis Iran,” she added.
Sanctions relief on Tehran also provides Oman an opportunity to deepen energy ties with gas-rich Central Asia via Iran, marking an important step toward building a Central Asian—Iranian—Omani trade route.
In March 2014, Iran signed a long-awaited deal to supply Oman with 10bn cubic metres of natural gas annually via a 350km pipeline — 200km of which is underwater — linking southern Iran to the port of Sohar in the north.
The pipeline is expected to come on stream in 2017, with Iranian gas slated to meet 7.4% of Oman’s domestic consumption. The two countries have also established a direct shipping line between the Shahid Rajaii Port and Sohar Port.
The deal includes two sailings per month, with the first ship operating under the agreement arriving in Sohar on 30 May, 2015.
On the back of this growth, the government is boosting investment in infrastructure associated with national logistics development plans, economic diversification efforts and increased trade with other countries.
The Sultanate recently announced the establishment of a new government holding company to manage its investments in ports, free zones, rail, maritime and land transport. The ‘Oman Global Logistics Group’ will act as the government’s development arm and will play a pivotal role in creating major growth opportunities. A key mandate will be the implementation of the National Logistics Strategy, under the direct supervision of the Ministry of Transport and Communication.
Oman’s increased investment in its logistics sector makes a lot of business sense, as the Sultanate aims to establish itself as a leading shipping hub in the region, encourage foreign direct investment in the country and build on its existing capacity to meet growing activity in maritime trade.
According to Arabian Monitor, sea transport accounts for 80% of freight and is likely to grow by 4.8% in 2016, driven by the increasing intra-regional GCC trade and demand from Asia, Europe, and Africa.
Furthermore, Oman’s logistics sector is expected to see an annual growth rate of 7% between 2016 and 2020 after generating some $8bn in revenue in 2015 – that’s 13% of the country’s GDP. Its growing relationship with Iran will only help support this growth, boosting the Sultanate’s hopes to become a leading industrial and economic power in the region.
“Geography and common interests have bound Oman and Iran. And Oman has for a long time tended to approach Iran as a strategic, economic, and political ally as part of its dialogue-based foreign policy,” said Eid-Oakden.
“This might not appear to be in the best interest of GCC countries from a geopolitical point of view, who continuously regard Iran as the catalyst of instability in the region. But as Omani-Iranian trade grows – it reached $370mn in 2015 — and ports such as Duqm offer Iran opportunities to develop new markets across the Indian Ocean, Oman’s fellow GCC states will also have much to gain from the sultanate’s expanding infrastructure and its access to the Arabian Sea and Indian Ocean.
“In particular, it is a chance for the GCC to decrease their dependence on the Strait of Hormuz for transferring their own oil and initiate plans to connect their roads, railways and pipelines to Duqm,” she concluded.
